The book Becoming Your Own Banker was written by Nelson Nash and published on Jan. 1, 2009. It was revised through six editions in the ensuing years. (See it on Amazon.)
The book has since become the ultimate guide to anyone that is interested in implementing the infinite banking concept. It is a must-read. Still, it is helpful to have a guide to quickly access the wisdom in the book and basic tenets of the financial philosophy that Nash became famous for.
As such, we have summarized the core concepts from the book in our Becoming Your Own Banker book summary guide below.
Part 1: Becoming Your Own Banker
Any type of transaction involves the flow of money, but where does that money come from? It comes from one pool of money managed mainly by banks, insurance companies, corporations, and a few individuals worldwide. The cash flows from the pool to help us meet our needs are primarily out of our control and back into the banking system.
“This book is all about how to create your own banking system so that you can control 100 per cent of your needs—becoming your own banker! Give it your close attention ,and it can make a radical improvement in your financial future” (pg. 13).
Chapter 1: How the Infinite Banking concept got started
The first chapter dives a little into Nelson Nash’s life and how it led to the Infinite Banking Concept.
Several aspects contributed to this concept. These include:
- Nash’s background in forest finance
- Life insurance sales
- Real estate
Nash was educated as a forester and spent 10 years as a forestry consultant. Much of his work dealt with compound interest over long periods. This meant that a lot of the work involved looking years into the future and making investments that would not see results for an extended period.
Nash also worked in life insurance sales for over 30 years. During this time, he learned how dividend-paying life insurance works, which is an essential aspect of the infinite banking concept.
Finally, the concept was strongly influenced by his experience in real estate. As his business ventures went well, he learned about the magic of leverage in the real estate world and was inspired to be part of it. He came across advice that entailed buying real estate, borrowing money, and paying interest rather than selling the property; all you gave up in that scenario was the interest you paid out. However, he was unprepared for what happens when the leverage works against you.
For a chunk of time, the interest rate Nash was accustomed to paying was 9.5 per cent, but this rate later rose to 23 per cent, and he was stuck paying a lot more in interest than expected. At the same time, he and his wife’s house was burglarized, jewelry was stolen, and his grandchild was diagnosed with cancer.
Amid this challenging time, Nash spent a lot of time praying and hoping for an answer to help him get out of his financial mess. Finally, he found his answer through life insurance companies.
At the time, people could get approximately five to eight per cent of the money from a policy they owned. However, it was dependent on how much you put into these policies. It became clear to him that he had to increase his life insurance premiums to create a pool of money that he could borrow from to pay the increased interest he owed. To do this, he began with revising his spending patterns. With this and a better understanding of how life insurance worked, he devised a system that worked well, which was the beginning of the infinite banking concept.
“Maybe you have found yourself in such a financial prison—or maybe you want to develop a system that will keep you out! Maybe yours is smaller or greater. Whatever, the principles are the same, and they will serve you well. It requires understanding—and it requires discipline to implement the idea, but it can change your life dramatically—even beyond your fondest dreams!” (pg. 17).
Chapter 2: Imagination
An essential aspect of the infinite banking concept is imagination. To illustrate this, Nash talks about a scenario from the 1700s. A German schoolmaster had trouble with the boys that day, so he gave them a math problem to quiet them down. They were told to add up all the numbers – one through one hundred.
The boys sat down with their slates figuring this out, but one boy stared out the window, then picked up his slate, wrote down the correct answer, and gave it to the schoolmaster. When asked how he figured it out, he explained how he visualized the solution and simplified it. This boy was Karl Gauss, a famous mathematician.
This example is to stress that Gauss did not invent a mathematical fact. Instead, he discovered a different relationship between fixed numbers that cannot be changed. Therefore, the knowledge he shared with that relationship can now be applied to other similar scenarios, and nothing can be done to change the fact/relationship he discovered.
Chapter 3: The Grocery Store
Continuing with the imagination exercise, Nash looks at the process of getting into a business where you are a consumer and a seller at the same time. An excellent example of this is a grocery store because everyone consumes groceries, and everyone around you is a potential customer.
When you begin studying the grocery business, you find the things necessary to succeed in this field, including a good location, high-quality merchandise, attentive staff, fully stocked inventory, etc. All of this will cost a lot of money.
Once the operation is set up, the difference between the “front door” and “back door” helps determine how you will be living. For example, if you sell a can of peas for 60 cents at the front door, and replace it at the back door for 57 cents, then you must turn the inventory 15 times to break even; this is the interest you must pay on the money borrowed to set up the grocery operations. If you turn the inventory 17 times, you make a profit; if you turn it 20 times in a year, it can help pay for early retirement.
Next, Nelson asks you to imagine if you were a male, married with children, and your wife bought groceries at your store, would she take groceries from the front or back? Many admit that the wife would want to go out the back door instead. However, this type of behavior is theft and can encourage more theft amongst employees and customers.
Many believe that they can do whatever they want with their business. However, the ones that pay for this theft are the customers getting their merchandise from the front door, and your business will need to sell more products to make up the deficit. The more you make, the more the IRS will take from you; this is another reason people would want to go out the back door instead.
If there is a situation where the profits from the grocery sales are not subject to income taxes, one of the incentives to go out the back door is taken away. The only reason left is the human instinct to use the back door. However, you and your family (plus some others) are captive customers in this scenario. If you charge wholesale prices, you are not creating more proceeds for retirement income. Charging the retail price on the can of peas helps you buy more cans of peas to sell to other customers. If you continue to do this for an extended period, it will create a profit. This will also create more value and income when selling the business down the line.
Chapter 4: The Problem
This chapter focuses on illustrating the problem with the current banking situation. To do this, Nash looks at an example of a 29-year-old young man making $28,5000 per year after taxes and what he does with the after-tax income.
In this example, the young man is spending 20 per cent of that income on transportation, 30 per cent on housing, and 45 per cent on living expenses (clothes, groceries, etc.). This means that only five per cent is disposable income. However, for this example, he allocates ten per cent to disposable income and 40 per cent to living expenses. The problem that Nash notes about these percentages is that banking organizations finance the costs.
This hypothetical person is offered a car financing package of $10,550 for 48 months with an interest rate of 8.5 per cent with payments of $260.04 per month. If this individual trades the care at 30 months instead of 28, 21 per cent of every payment would be interest. If he goes 48 months before trading, the interest will still be 20 per cent.
This same line of thinking can be applied to housing and living expenses. Most times, people end up paying large amounts of interest. Therefore, a portion of the disposable income paid is in interest. For this example, he says he puts that number at 34.5 cents. This would mean that assuming he is trying to save per cent of his disposable income, there is a 3.45 to 1 rate of interest paid out compared to savings.
Nash also compares the situation to flying a plane. The example is as follows:
You are in Birmingham, AL, with an airplane that can fly 100 miles per hour, and you are flying to Chicago. However, there is a headwind of 345 miles per hour. If the air mass is above you, there is no headwind, so that the plane will be going at 100 miles per hour. If you decide that this speed is good enough, you will remain at this speed. However, if you wait for the air mass to move, you will have a tailwind of 345 miles per hour on top of the 100 miles per hour. The plane would then be going at a ground speed of 445 miles per hour.
In this scenario, Nash states that most people in America would be flying with a 345 miles per hour headwind. However, if you have 345 miles per hour tailwind instead, those people have twice the wind than you would. Most in this situation would try to make the airplane go 105 miles per hour. It is better to spend their energy instead of controlling the flying environment. You cannot control the environment when flying, but you can do this in the banking world by controlling how banking relates to you.
“That’s what this book is about—creating a perpetual “tailwind” to everything you do in the financial world…This is the unique message of The Infinite Banking Concept” (pg. 27).
Chapter 5: Creating a Bank Like the Ones You Already Know
Before trying to create a bank like the ones you have been working with for years, there are a few crucial steps you must go through.
First, you must research and have a firm grasp of this field and run your own banking business.
Next, you must go to the Banking Commissioners’ office and apply for a Bank Charter. This aspect is often not easy. It can take a considerable amount of time and cost substantial money to get there. Like the grocery example, this would be like finding a good location and suitable building for your business.
Once you are in business as a bank, you must entice people to make deposits in it. You must spend money to do this. Once people have made deposits, you can lend those deposits. However, it is vital to be prudent with lending. For example, if you have a capital of $100,000, it would not be wise to lend $50 million to another institution.
There are examples of banks not prudent with lending. For instance, in 1983, First National Bank of Midland, Texas, had a loan portfolio of $1.5 billion, and 26 per cent of those loans were not getting their money back. Responsibility for supporting the bank fell to the stockholders. The stockholders’ equity lost 87 per cent of its value to $12 million. When the public found out, the deposits went down further. Within two months, they were out of business.
Nash uses this example to illustrate an essential part of loans. If you do not pay back loans, you will effectively destroy the business.
Getting into the banking business this way will be costly and time-consuming. However, there is an easier way to create your own banking system – dividend-paying whole life insurance. The problem is that few people know how the business works and who to use these policies to your advantage.
To explain this concept further, Nash compares it to “co-generation.” This word is used in the production of electrical power. It refers to producing two or more forms of energy from one fuel source. What do you do with this power if you have a plant that creates more electrical power than you need? Of course, you can sell it, but it is easier to sell to a power supplier than making a new plant and canvassing for customers.
“Creating your own banking system through the use of dividend-paying life insurance is much like co-generation. All the ingredients are already there in place. All you have to do is understand what is going on in such insurance plans and tap into the system” (pg. 33).
Chapter 6: Creating Your Own Banking System Through Dividend-Paying Life Insurance
Nash explains where to begin with the infinite banking concept in this chapter. First, he stresses that everyone is aware that they finance everything they buy; either the interest is paid to someone else, or you give up the interest you could have earned instead.
He then explains the concept of Economic Value Added (EVA). EVA is the amount of profit left over after the cost of the company’s capital is deducted from the operating profit. Before this concept was introduced, companies were borrowing capital from banks and paying interest but treating their capital as having no value. Once this concept was understood, profitability increased.
Creating a product begins with engineering, and the engineers of the life insurance companies are actuaries. They deal with the people that have been through a screening process for policies, work with a theoretical lifespan and provide that information to rate makers. These people determine what the company will need to charge the client to pay the death claim down the line. These matters are then turned over to lawyers to make contracts sold to clients. Finally, administration workers hold these matters all together.
To make an insurance plan work, the policy owner makes payments, and the company uses that money to produce the benefits promised in the contract (e.g., by investing in real estate). However, the policy owner has total control over how the money in the policy is invested. Therefore, money can only be invested by the insurance company if the policy owner does not use the money and pays interest instead. If the owner does not do so, the company has access to an increasing pool of money.
Sometimes the policy owners die, and the money is given to them from this pool of money. However, policies are generally made to benefit the company. “That is because the cash value is guaranteed to ultimately reach the face amount of the policy by age 100 of the Insured. There is an ever-decreasing “net amount at risk” for the company” (pg. 37).
Essentially, the contracts are designed to do well no matter what. So once the dividend is declared, the policy can never lose value in the future.
Nash compares this to an example in the airplane world. A plane is loaded with as much fuel needed to fly about 10,000 miles. After flying 8,000 miles, the plane can do more than when it took off because a lot of fuel has been burned, and the airplane weighs less. However, the engines can still produce as much power as when they took off. Therefore, the plane gets more efficient with every mile it flies.
There can be periods where expected earnings are lower; businesses would turn to stockholders in this case, but this does not work for life insurance. Instead, capital is added to counteract this. For example, if accountants report that they have collected $1.10 from someone’s policy but found they only needed 80 cents to deliver the benefit, then the directors would decide what to do with the 30 cents. Most would put a portion of this into a contingency fund for unexpected risk and distribute the remaining dividend. Distributing the dividend is not a taxable event. If the client used the dividend to purchase additional paid-up insurance, it would result in an “ever-increasing tax-deferred accumulation of cash values that support an ever-increasing death benefit” (pg. 39).
Nash then explains his point further with another example (referring to the example made earlier in this book: the young guy making $28,500 after taxes). A salesperson calculates the value of an individual for the policy by what he expects to earn a year and multiplies it by the number of years he expects to work. With factoring things such as pay raises into the equation, it is feasible to assume he will have an annual income of around $38,000. For a 29-year-old at the time, this would produce approximately $1,368,000 in income, and about 40 per cent of this would be used to pay for his needs. This would leave about $820,800 to his family. The salesperson would then calculate the principal sum and determine $400,000 would work. This guy would be paying over 35 per cent of every dollar of after-tax income in this scenario.
Suppose the man puts $50 per month into life insurance premiums and then goes to a dealership to buy a car and finances that with another loan. The man will now be paying $50 for the insurance and $260 to another finance company. So in total, he will be paying $310 that will go into the same pool of money directly and indirectly. However, if he paid $310 into the company as a premium for about four years, he could make a policy loan and pay for the car with cash.
It would likely take more than just four years to capitalize on the infinite banking concept. It is estimated that it takes at least seven years to profit from an investment. “So, why not capitalize each policy purchased for at least 7 years, to the point where dividends will pay all the remaining premiums on the policy” (pg. 42).
“It will take the average person at least 20 to 25 years to build a banking system through life insurance to accommodate all his own needs for finance—his autos, house, etc. But, once such a system is established, it can be passed on to future generations as long as they can be taught how the system works and suppress their baser instincts to “go out the back door of the grocery store”—or in a word that is more descriptive—steal” (Pg. 42-43).
Chapter 7: Basic Understandings
In this chapter, Nash reiterates the basic understanding people must know and understand about the infinite banking concept. This includes:
- You “finance” everything you buy. As a result, either you pay interest or lose out on the interest you could have earned.
- Create an entity. An example of an entity would be a life insurance policy. These are always created to have value. The person who owns the policy has absolute control over how the money is lent and borrowed. The insurance company can only invest money if the policy owner does not use the money and pays interest instead. At the end of the year, the company analyses the policy’s value, and a dividend is declared, which cannot be taxed. “Dividend is then used to buy additional paid-up insurance at cost, then the result is continuous compounding of an ever-increasing base” (pg. 44-45).
Part II: The Human Problems – Understanding Parkinson’s Law
In the first section, Nash talks about the technical aspects involved in the infinite banking concept. This chapter will look at the limitations we face with Parkinson’s Law.
- Northcote Parkinson was a British essayist, lecturer, and economist who shared observations about human nature limitations. Some of these observations include:
- Work expands to the amount of time given to finish it. So, for example, if you are given an assignment due in three days, it is not surprising that it will be completed later on the third day.
- Enjoyment of luxury becomes a necessity. Once you have gotten used to luxury, we view it as necessary. For example, cars used to have no air-conditioning. That was fine when there were no alternatives, but few would now pick a car without this feature.
- Expenses to rise based on income. When we come into more money, we often view more things as necessities and spend that extra money on them.
“Parkinson’s Law must be overcome daily. If you cannot do so then just go ahead and give up—you are destined to become a slave! That’s the bad news. The good news is—if you can whip Parkinson’s Law you will win by default because your peers can’t do it—and everything you do in the financial world is compared with what they are doing” (pg. 49-50).
Chapter 8: Willie Sutton’s Law
The Willie Sutton Law stems from a story of an interview with the robber. In the story, a reporter asked Sutton why he robbed banks. According to the reporter, Sutton replied, “Because that’s where the money is.”
Essentially, it means that when trying to diagnose, do, or achieve something, you should choose the most apparent option or route to do so. Essentially, it is a reminder to focus on things that produce the best results most easily and effectively.
Nash notes that one of the biggest thieves in this world is the Internal Revenue Service. He explains it as follows:
If a person goes up to another person in the mall, puts a gun to their head, and tells them to give them all the money in their wallet, those witnessing the situation will view it as theft. However, if the same people gathered beforehand, and Nash explained for an hour how they would divide the contents of the wallet among them, this would be viewed more as democracy.
He explains how taxation can be viewed as a parasite-host relationship.
“Government is a parasite and lives off the productive taxpayers, the host. It is self-evident that if the parasite takes all the produce of the host, then both parties die” (pg. 52). Therefore, the government resorts to an exception to the rule (e.g., 401-K plans), but even with those, the government still controls much of what you do.
“Economic problems are best solved by people freely contracting with one another and with government limited to the function of enforcing those contracts. And the best way to do so is through the magnificent idea of dividend-paying whole life insurance!… And only the people who care about others that are dear to them participate in the idea” (pg. 53-54).
Chapter 9: The Golden Rule
The premise of the Golden Rule is “those who have the Gold make the rules!” (pg. 55). This chapter expands on this idea.
Most people are so focused on living in the moment that the concept of creating personal capital through savings has lost much of its value. Therefore, someone else must provide the capital to live our lives, which comes at a high cost.
He illustrates this idea through the Japanese company Panasonic wanting to build a plant in Mexico. To make a plant there, Mexico required that Mexican people own 51 per cent of the business. As a result, Panasonic pulled out of the agreement. In this scenario, Panasonic had the “gold,” so it made the rules.
Essentially, those that have capital tend to have more control over decisions. If you have more cash, good opportunities tend to arise. However, people are still reliant on someone else supplying the capital. In the same vein, there is a tendency to look for government solutions to a problem believed to be out of their control (e.g., obtaining a loan to afford college). This way of thinking is widespread, and it needs to be overcome for success.
“Succumbing to these feelings produces a huge burden on your financial future—the price must be paid. You will always be at the mercy of the ones who have the gold!” (pg. 57).
Chapter 10: The Arrival Syndrome
This chapter discusses what Nash calls “The Arrival Syndrome.” He views this as one of the most limiting mindsets someone can have because we lose much of the ability to receive inspiration. Essentially, it means that people do not try to do better or think differently because we already know what we need to know.
To illustrate this, he uses the example of Ed Deming, a well-known business consultant. He is known as the person that taught Japanese businesses about quality. He first tried to preach his ideas to American companies but was brushed off because they believed they were already doing what Deming suggested. Therefore, he brought his ideas to Japan, and they were a success. As a result, many business schools now accept and praise him and his ideas.
The Arrival Syndrome is one of the obstacles to teaching about the Infinite Banking Concept.
“[T]his is probably our hardest job—to get people to open up their minds and take an in-depth look at just exactly what is going on in the business world and correctly classify what is seen” (pg. 61).
Chapter 11: Use It Or Lose It
This chapter focuses on the last aspect of human nature that must be dealt with to be successful in becoming your own banker. It is difficult to get out of our comfort zone; however, it is necessary.
Nash views his teachings of the Infinite Banking Concept to argue that the world is round when most believe it is flat. It is a relatively simple concept to explain, but it becomes more difficult if you are part of the paradigm that thinks the world is flat.
To accept a different paradigm, you must develop new habits and ways of thinking. For example, Nash finds that some get caught up in the interest rates when learning about the Infinite Banking Concept. Instead, it is understanding money flow and charging interest to yourself and what you own. Doing this with minimal taxation can significantly improve your financial situation.
“Just like EVA [Economic Value Added], to be effective, The Infinite Banking Concept must become a way of life. You must use it or lose it!” (pg. 64).
Chapter 12: Creating The Entity
When actuaries begin creating an insurance plan, they look at many factors that will affect the value of the plan. This includes mortality rates, illnesses, mental health concerns, etc.
One of the main things factored into the equations is the theoretical lifespan of individuals. Actuaries look at things such as mortality tables. If the rate that participants with an insurance or pension plan have died is better than what is shown on a mortality table, better dividends will be given to policyholders. This is the desired outcome.
When creating a plan, cost calculations begin with how much it would cost to cover someone for their whole life. This is called single premium life insurance. However, many do not choose this option. Instead, they choose term insurance. This involves renting a single premium life insurance for a particular time frame, but the death benefit is contingent on the individual dying within that time frame. This is like other forms of insurance (e.g., fire insurance), except those are more for “what-ifs.” Death is something that you know will happen at some point, and it is just a matter of “when” it will happen.
Nonetheless, Nash notes that particular life insurance policies have more value than some may notice. They have fewer qualities in common with standard insurance plans and more in common with banking. “A better name would have been “a banking system with a death benefit thrown in for good measure'” (pg. 68). The idea of the Infinite Banking Concept stems from this idea that there is a lot of nonsense in the market because things are not classified correctly.
Nash compares this to the common potato. In the late 1500s, conquistadors of Spain were in South America looking for gold. They did not find gold but instead found potatoes. However, when potatoes were brought back to Europe, they were viewed as poisonous due to their scientific classification. However, over time they realized the value of the potato for consumption and medicinal means. A similar misunderstanding happened with the tomato plant as well.
When choosing a plan to begin creating an entity with, it is best to select a close plan close to the Modified Endowment Contract (MEC) without crossing it. These are plans that are not treated as life insurance by the IRS. Therefore, these plans will be subject to taxation.
For this reason, it is best to choose a plan in the middle of the scale (figure on pg. 70) and add Paid-Up Additions to it. The base policy and the Paid-Up Additions will pay dividends that can be used to buy more Paid-Up Additions insurance.
“[T]he objective should be simply to get as much money as possible into a policy with the least amount of insurance instead of trying to put as little money in and provide the greatest amount of insurance (initially). It is the exact opposite of what one thinks about when purchasing ‘insurance'” (pg. 71).
Part III: How to Start Building Your Own Banking System
In this section, Nash talks about five methods of financing an automobile over a person’s lifetime. These examples assume the car will be replaced at four-year intervals, and the financing package will be $10,550 at 8.5 per cent interest for 48 months. The timeframe for this will also be 44 years.
Method A: Leasing the car for 44 years.
This is the most expensive method. It is difficult to calculate the total cost with this example, but one can assume that the person leasing has no equity to show from this expense at the end of each four years.
Method B: Through a Commercial Bank
The calculation for this is more simple: $260 per month for 528 months = $137,280. By the end of the four years, the person has a four-year-old car to trade in to buy the next car. This will likely be cheaper than the first method.
Method C: Pay Cash For Each New Car.
Paying for a new car with cash every four years would cost $116,050. With this method, the individual would still have to make car payments. However, the difference between the first two is that these payments will go to a savings account to pay for the new car in four years instead of a leasing company or bank.
Method D: Accumulating Money and Paying a Higher Annual amount
This method involves accumulating money from a new investment (within seven years). In this scenario, the individual would accumulate cash in a savings account and purchase a Certificate of Deposit (C/D) of $5,000 with a yield of 5.5 per cent interest.
The C/D will attract the IRS, who will take some of the earnings, but he will still earn 4 per cent after taxes. The results of this would be an after-tax amount of $41,071.13. He can now start self-financing the car purchases from the system now. He can withdraw $10,550 from the C/D account, add the trade-in car, and purchase a vehicle instead that is not overly expensive.
He adds funds to his savings and takes out $3,030 to purchase a new C/D each year. The individual would achieve more significant results with this method than with the previous methods because it results from three more years of accumulation with the seven years at an additional amount ($5,000).
Method E: Dividend-Paying Life Insurance.
This method involves creating a banking system to finance the cars through the help of dividend-paying life insurance. In this scenario, the person puts the $5,000 from the previous example in high-premium life insurance with a mutual life insurance company.
After seven years of capitalization, the individual withdraws dividends to pay for the car. To do this, the person must make premium payments to the policy instead of a finance company, but at the same amount as the example above, $3,030.
Method D produces excellent results as well. But what is not considered is the expensive and time-consuming process of getting a Bank Charter and deposits from others in Method D. Both methods rely on the borrowers making their business successful. The main difference is that the owners earn interest and dividends with Method E, and none go to stockholders. So the difference between Method D and Method E is what went to the stockholders in Method D.
There is also a considerable difference in the retirement income that can be taken from each method. If $50,000 were taken out each year with Method D, the C/D account would be out of money in five years and eight months. In contrast, the life insurance company will continue to grow with withdrawn dividends. If the person were to die at 85 (65 years into the policy), they would have withdrawn $650,000 in dividends on top of the death benefit, which is over one million dollars.
“This is the essence of what The Infinite Banking Concept is all about recovering the interest that one normally pays to some banking institution and then lending it to others so that the policy owner makes what a banking institution does. It is like building an environment in the airplane world where you have a perpetual “tailwind” instead of a perpetual “headwind” (pg. 79).
Chapter 13: Expanding the System to Accommodate All Income
When someone receives a payment, they will often deposit it into someone else’s bank. Even if you have your bank account, the institution lends your money to others, and the interest you pay means that the money will be gone forever.
Through infinite banking, the same process will occur, except the individual will make loans to themself and pay them back to the policy. It is the same payment as a banking institution, except it happens tax-free, and the interest never leaves the account.
So far, Nash has looked at using the life insurance banking system to finance cars, but it can be used to finance most things. You can use the same process to finance comprehensive and collision insurance. To self-insure, you would have to determine how much more you need to put into life insurance policies to assume the risk. This can be determined by getting a quote from an auto insurer. If they quote $750 per year for a $500 deductible, you would pay your life insurance $1,000 for zero deductible. This can also be applied to a house mortgage. If enough money has been accumulated to pay off the mortgage, you can borrow and pay it off while making sure you pay the policies you would have been paying the mortgage company.
Part IV: Equipment Financing.
Nash begins this section by refreshing people on the steps to take to get into the personal banking business.
First, you must select an appropriate plan from a dividend-paying life insurance company and put money into it. It would be best to accumulate capital in this policy for some time. He advises four years minimum, but more would improve profitability.
Nash illustrates a scenario for a 30-year-old man who owns a logging business. If he put $40,000 into the plan for four years, with a Life Paid-Up premium of $15,000 per year and a Paid-Up Insurance Rider premium of $25,000, at the end of four years, the cash value would be $157,363, which is almost the same as his cumulative outlay of $160,000.
He would no longer have to pay premiums in the fifth year because the dividend and paid-up insurance will cover the value. The death benefit will then be at $1,651,077. After 36 years, the cash value will be around $1,517,320, and the death benefit will be approximately $2,406,948. The death benefit has grown and is tax-free.
When the insured turns 66 and is considering retirement, he can begin withdrawing $92,000 per year in dividends from that point on. Then, if he dies at 85, he would have recovered the premiums paid into the policy ($160,000), plus $1,588,000, and still gives a $2,407,736 death benefit.
Nash explains other examples where the individual can use the life insurance system to finance equipment for his logging business. This can be done by borrowing from the cash value within the policy. In each scenario, the individual must set up a loan repayment plan that equals or exceeds what the individual would be paying to the finance company he used in the past. Doing this enables more cash flow which becomes capital and can be lent to more people down the line.
It is also essential that the individual does not finance from too little capital. To avoid this, it would be optimal for the individual to add additional policies to finance from. It is also important to continue to capitalize the policy for four years or longer.
Another strategy to improve the capital is to backdate the policy for six months. Pay the premium now, but ask the company to date the policy six months ago so that there will be less time before you can use the policy to cut out the finance companies from the business equation.
The next improvement would be self-insurance with comprehensive and collision damage. It is also advisable to self-insure for liability. By doing this, the individual would be making what the finance company and the casualty insurance company are making, all tax-free.
The individual would also benefit better from owning the policies himself, instead of putting it under the ownership of the company or corporation. The individual can purchase the trucks himself and lease them to the company.
“By doing it this way he can have an interest deduction for the policy loans used to purchase the equipment (the loans are for business purpose)—he can depreciate the trucks over a reasonable time—and he has a “captive customer” to lease the equipment to that is sure to make the lease payments” (pg. 103).
All interest in these scenarios has been paid by withdrawing additional dividend credits. The system can further be improved by selling the equipment down the line. In the end, the individual in this example would have over $3,500,000 available at the age of 66.
Part V: Capitalizing Your System and Implementation
If you have decided that you would like to reap the benefits of the Infinite Banking Concept, you may be unsure of where to start. Nash notes that the first thing you must have is desire. IF you want to get the benefits from this method, you must first reflect on your current financial situation and commit to changing for the better. This would involve changing your priorities and realizing the value of becoming your own banker.
A great way to get started is to find a consultant or coach familiar with the Infinite Banking Concept. They will be there to help mentor you in the process. It is also a good idea to organize or join a club of like-minded people that meets periodically to support each other in the process.
However, the most important thing you can do is get started as soon as possible. “The longer you wait, the more you have penalized yourself” (pg. 117).
Chapter 14: The Retirement Trap
In this chapter, Nash discusses the downfalls of social security and pension plans.
He illustrates this through an example. If the doctor puts $10,000 into their pension plan, the money will not be their money. Instead, half of that money will be, but the other $5,000 will pay taxes that allow you to have the plan. The doctor has done an excellent job at putting money into the fund, but social security needs half of the money the doctor put in to stop it from falling.
Many articles share the sentiment that social security is a scam or a fraud, and Nash believes that it is a matter of time before it runs its course and collapses.
He also believes that pension plans have a similar fate. He views them as self-destructing. He also encourages readers to read “The Pension Idea” to learn more about how pensions do not work.
Chapter 15: The Cost of Acquisition
Many businesses realize that it is necessary to finance a business, but they do not address the cost of acquisition of finance. Unfortunately, it is often costly to do this.
Nash looks at the example in the book “Iacocca.” Lee Iacocca shared that he would not have gotten involved in Chrysler if he had known how bad off it was. To get out of it, he had to get a government-backed loan. To get this, he had to gather the highest-paid members of the company to persuade lobbyists. Months later, they had succeeded in doing so.
However, they only had the government back guaranteed. They also had to get the money from the bank and only was given one-third of the amount at a time. Then, when the next third was needed, they had to go through the same costly and time-consuming lobbying process.
This example shows the cost of the acquisition of finance; the cost of finance in addition to this. The ones that paid for all the activity were Chrysler customers.
“If you are in command of the banking function, you do not have to go through all this expensive erosion. The Infinite Banking Concept does exactly that! You can make timely decisions. There is no cost of acquisition. You compete with others who must go through the erosion that has been outlined” (pg. 125).
Chapter 16: “But, I Can Get a Higher Rate of Return”
When someone is introduced to the Infinite Banking Concept, many know that they can get a higher rate of return from a different investment. However, that is not the point of becoming your own banker. The focus is not on the investment yield. Instead, it is on how to finance things you buy with your own banking system.
Nash demonstrates this idea through the following example:
Investor “A” invests $100,000 for one year and earns 20 per cent. So the net yield would be $14,000.
Investor “B” builds cash values of $100,000 into a dividend-paying life insurance plan, then borrows from the system for eight per cent and makes the same investment. The net yield would be $8,400. However, this investor would also earn $8,000 from the banking system, so that the total yield would be $16,400. There will be a delay when first setting up the banking system, but it will be beneficial in the long run.
“If you are in command of the banking function, you do not have to go through all this expensive erosion. The Infinite Banking Concept does exactly that! You can make timely decisions. There is no cost of acquisition. You are in competition with others who must go through the erosion that has been outlined” (pg. 125).
Chapter 17: An Even Distribution of Age Classes
Nash compares creating a banking system to a forest management plan.
An owner has 4,000 acres in this plan and plans to grow on a 40-year rotation. The land will be divided into 400 compartments, and each year, they want to harvest one compartment and replant it. It will take 40 years to complete this process. It will involve several years of growth and removal of less desirable trees (improvement cutting). Once the replanting begins, there will be a final harvest on one compartment and three improvement cuttings on the other compartments. This will create four sources of income during a year. However, it will still take 40 years for this process to get done.
Infinite banking is a similar process. It may take a while to become proficient in it and reap its rewards, but it will be beneficial down the line. It can also benefit later generations.
He uses the example of an elderly couple that purchased life insurance plans for their four grandchildren at $2,000 per year. When they died, ownership was given to their sons. Those songs have done the same thing for their grandkids. After 22 years, the base premium can be paid by dividends, and surplus dividends can buy additional paid-up insurance. The cash value for the grandkid at 22 years would be $101,260, and this value could be up to $4,103,852 by the age of 70. The individual can then withdraw dividends to $225,000 per year. If the individual dies at 85, he would have recovered the initial $44,000 put into the policy plus $3,556,000 and give the death benefit of $6,375,923 to future generations. They can further reap the benefits by using this policy to finance cars and mortgages.
This plan benefits future generations, builds up cash value, avoids social security/pension needs, creates passive income, simplifies estate planning, and more. It also encourages a wealth mentality and control over your finances.
Chapter 18: A Different Look at the Monetary Value of a College Degree
In this chapter, Nash looks at the value of a college degree. Growing up, he was told that getting a degree would offer more monetary value, but he suspects this may not be the case.
First, he looks at where the desire for everyone to get a college degree originated. He traces it back to World World II. Many students wanted to get their degrees because they feared that those returning from war would return to civilian life and ruin the economy. Therefore, getting a college degree became more of a necessity. Nonetheless, the cost to get one has risen past the economy’s inflation.
To look at a degree’s monetary value, Nash compares the cost of a degree to the importance of teaching a child to use dividend-paying whole life insurance.
For his example, he assumed that the college degree would get $20,000 per year for four years. If you put the same amount into the high-premium policy, the dividends would be used to pay the base cost for the premium after four years. If that individual retired at 70, the plan’s cash value would be around $2,457,303, and $145,000 dividend credits could be withdrawn for retirement purposes. If the individual was insured to 85, they could have withdrawn a total of $2,175,000, and if they died that age, they could also get a death benefit of approximately $2,175,000.
Nash does not believe that a college degree would produce as high of a financial result. The insured individual could further benefit themselves by using the policies to finance cars and mortgages, and the like.
“So, in evaluating just the financial benefits of the college degree at a cost of $80,000 vs. putting that same $80,000 into high-premium whole life insurance, I don’t believe the degree is as valuable. As a matter of fact, the probability of the college-educated person ever learning the benefits of “banking” through the use of whole life insurance is not very good” (pg.144).
Nash notes that this does not mean he is against higher education but believes being educated on using life insurance policies to your advantage will likely provide more value.
Chapter 19: What if I am Uninsurable?
For some people, given various circumstances, they may not be insurable. Nash offers an alternative an individual could do instead to get the benefits of being his own banker while being uninsurable.
He provides the example of a 50-year-old father who cannot be insured. Yet, he has a 23-year-old daughter who is in excellent health. He puts $20,000 per year into a policy on her, $10,000 into the policy, and $10,000 into a Paid-Up Additions Rider.
After 20 years, they decided to stop premium payments and draw out $28,500 per year in passive income from the cash values of the Paid-Up Additions. This is tax-free and equals the base cost for the policy.
After another 15 years, the father is 85, has taken out dividend additions, and wants to continue getting tax-free income. He can do this by switching to policy loans. If he dies at 85, he will receive $1,110,726, which will be given to his daughter.
The policy is still there for the daughter to finance parts of her life. However, if she chooses not to, she would still be able to surrender the dividend additions in the amount of $150,000 for the rest of her life. If she dies at 90, this would mean she has received $3,150,000 in passive income and will be giving a $2,378,391 death benefit to future generations.
Chapter 20: Points to Consider
In the final chapter, Nash lists seven important points to take away from this book. These are as follows:
- “There are only two sources of income—people at work and money at work” (pg. 157)
- Will knowing that you will get the money back, tax-free as passive income, encourage you to put more money in?
- When you use traditional banks, they get the total value of your money. However, if you create your own banking system, you will be deposited into your own bank and reap the full benefits. Nonetheless, this takes time, closer to 20 years for some, so it is something you must commit to. It can benefit future generations if you do.
- When the government creates a problem and gives you a break, it benefits them more than you. In the case of taxation, they could help consumers by cutting taxes; instead, they offer “tax breaks” such as retirement and pension plans.
- Wealth will reside somewhere. It is up to you where you want it to reside. With life insurance plans, “you can do any of the other things in life that you desire” (pg. 158).
- “You finance everything you buy. You either pay interest to someone else, or you give up the interest you could have earned elsewhere. There are no exceptions.” (pg. 158)
- “Your need for finance, during your lifetime, exceeds your need for life insurance protection. If you solve your need for finance through life insurance cash values, you will end up with so much life insurance; you can’t get it past the underwriters. You will have to ensure every person in which you have an insurable interest” (pg. 158).
